Details of a company's first two years of operations are shown:

Year 1 Year 2

Sales @ 20 1,000,000 1,200,000

Opening stock in units 0 5000

Units produced 55000 55000

Units sold 50000 60000

Fixed selling and 150,000 150,000

administrative

expenses

The company's unit product cost is computed as follows:

Direct materials 4

Direct labour 7

Variable manufacturing overhead 2

Fixed manufacturing

overhead (220,000/55,000 units) 4

Unit product cost 17

Required:

a)Prepare the profit and loss account for each year using Absorption costing.

[9 marks]

b)Calculate what the profit would be each year if the company used Marginal costing.

[9 marks]

c)Reconcile the differences between the two profit figures and explain the circumstances in which one method may be more suitable than the other.

[7 marks]